Consolidation loans for bad credit are one way of making life easier for yourself as you do not need to remember to repay each individual debt each month. If you take out a loan with a lower rate of interest, you might even save money each month. However, before rushing into taking out a consolidation loan you do need to understand exactly what is involved and weigh up the options for and against.
What Exactly Is a Debt Consolidation Loan?
You might have had loans and/or credit cards in the past and still be paying off those debts. If you have more than two types of unsecured debts, you might want to consider consolidating them and taking out a loan to cover them all, pay them off, and then repay just one single loan.
In this case, you would take out a loan that is called a “consolidation loan”. The consolidation loan is generally offered by way of an unsecured loan or a secured loan. Some lenders might call the unsecured loan a personal loan.
Here at Bonsai Finance, we work alongside a panel of lenders who offer personal loans up to £5,000, which can be spread out for up to 36 months. If your debts fall into this category, you might give consideration to such a loan to cover them all, pay them off and then repay just one affordable monthly repayment.
I Have Bad Credit Can I Still Get a Loan
If you have a poor credit rating, you may be eligible to get an unsecured consolidation loan. Of course, your credit rating is going to affect the rate of interest the loan comes with, generally the poorer the credit rating the higher the rate of interest. People with bad credit are rarely offered deals such as 0% interest for a specified period, something that would help you to clear your debt faster.
If your credit rating is particularly unhealthy, you might be offered a secured loan instead. The secured loan means you have to put your home up against the loan and this is the type that might be offered if you want to borrow a large sum of money and you have a very bad credit rating. You need to give a great deal of thought to a secured loan as it means if you do not keep up with the loan repayments you are at risk of losing your home.
Your credit rating is going to be taken into account by all UK lenders. It is the lender’s way of determining how big a risk you are, and how you have managed money and debts in the past. However, even with a bad credit rating, it may still be possible to get approval for a consolidation loan, providing the lender thinks you are in a position to be able to repay the loan. The lenders we work with will consider your current circumstances and ability to repay, along with your past credit history.
The Advantages and Disadvantages of Consolidation Loans for Bad Credit
A great deal of thought has to go into a consolidation loan before rushing into taking one out.
A consolidation loan might make sense if you:
- Find a loan that comes with a lower rate of interest than what you are paying now on your loans or credit cards;
- You can spread the loan out over affordable monthly payments but do not have to pay too much in interest that any savings would be wiped out;
- You pay off the existing credit cards and/or loans and do not use them again to rebuild credit back up;
- You take any fees and charges, such as early repayment fees into account to ensure these do not outweigh any savings you would make.
A consolidation loan might not make sense if:
- Your financial future is unsure so you do not know if you could maintain the repayments of a consolidation loan;
- You would have to spread the cost of the repayments over many years, to such an extent that the interest accumulated would outweigh savings;
- Your credit rating is extremely poor and you have to take out a secured loan, which puts your home at risk;
- You would be unable to combine all outstanding debts in the consolidation loan.
Does A Consolidation Loan Make a Difference To A Credit Rating?
Taking out any type of loan can affect your credit rating in a good or bad way. If you are taking out a consolidation loan, you should close off your other credit accounts, (the credit cards and/or loans that you are paying off). This will then show them on your credit file as having being paid off and closed and this can be good for your credit file.
If you take out a consolidation loan and pay off the outstanding credit on any other credit cards, but keep the accounts open and start to use the credit cards again, it can affect your credit file negatively.
If you were to pay the consolidation loan on time each month and go on to pay it off without any late or missed repayments, this would have a beneficial effect on your credit file. By the time you have paid the consolidation loan off, you should be debt free.
On the other hand, if you struggle to meet the repayments and make late repayments or worse still falter on the loan, it is going to affect your credit rating negatively.
Consolidation loans for bad credit are one solution to managing more than one debt and it is a step towards becoming debt free. However, a great deal of thought does have to go into one before applying for it. If you have decided a consolidation loan is a way to go, we might be in a position to match you up with a lender offering competitive rates and affordable loans.